Apple's iPhone supply chain faces sharply increasing costs in China

A close look at the iPhone 4 supply chain demonstrates how contract manufacturers, including Apple partner Foxconn, are fighting rising costs in China in order to stay competitive and profitable in today's market.

A new report this week The New York Times used Apple's iPhone 4 as an example of rising costs in the Chinese supply chain for global consumer electronic devices. It spoke of impending increases in manufacturing costs in China, noting that "soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs" could significantly increase production costs for the Cupertino, Calif., electronics company.

Although estimated labor costs comprise just 7 percent of the overall final cost of the iPhone 4, analysts note that many of the companies in Apple's supply chain also rely on efficient, low-margin Chinese factories to keep their costs low. The report also said that Apple's high margin products should be able to absorb the increased costs with minimal disruption, while other brands may face a bigger challenge.

A large percentage of Chinese factories are located in the southern part of China, especially Shenzhen, which, as a Special Economic Zone, provides special government-endorsed incentives to manufacturers, with unique laws that are more relaxed than in the rest of China. Despite these incentives, Foxconn Technology, a division of the Taiwanese-based Hon Hai Group, recently announced its intention to move "hundreds of thousands of workers to other parts of China" in response to rising costs. Moving its operations inland would reportedly save Foxconn 20 to 30 percent in labor costs.

The report said that wages in China have increased by more than 50 percent since 2005. Salaries are expected to increase another 20 to 30 percent this year, as workers continue to feel they are being underpaid, and those employees have the support of local governments.

Foxconn has 800,000 supply chain workers in China alone, with contracts to supply major electronics companies including Apple, Dell and HP. Foxconn is the biggest name in the $250 billion industry, which the report noted is "invisible to consumers."

The report draws heavily from a teardown report of iPhone 4 from market research firm iSuppli. The El Segundo, Calif., firm placed the total bill of materials for the new smartphone at $187.51, but does not include labor and manufacturing costs. According to the Times, the combination of sharply rising wages, continued appreciation of the Chinese currency, and unsustainable labor practices are threatening both the margins of contract manufacturers and major brands and the stability of China's manufacturing boom.

In June, it was reported that Apple was giving back some of its profits to workers who assemble its products. Foxconn had already promised a 20 percent raise in the wake of investigations into several highly publicized suicides that took place at the manufacturing giant's Shenzhen plant. In response, Apple conducted an independent investigation into the working conditions at the plant, which employs over 400,000 workers.

Workers in the third world should not suffer so that westerners can have a device to send tweets and play games for a low price. While we shouldn't expect exactly the same conditons as we are used to for these workers, it's reasonsable that they shouldn't have to work 70-80 hours per week and still not have enough money (or time) to change their station in life.

So in my opinion, let the labor costs rise and if that means the phone will cost (after subsidy) $219 instead of $199, so be it.

We've become completely spoiled by the absurdly low prices of most consumer electronics and as a result, we've become even more of a "throw-away" society. And one of the costs of that insistence that everything be priced so low ($49 DVD players anyone?), is that we've exported millions of factory jobs (which isn't all bad news - it's not terrible that people in the third world are gaining employment and in at least some cases, creating a middle class, if they don't feel like committing suicide first).

And yet, there are items that are priced (IMO) absurdly high: like $40 cases for an iPad. For $40 for a small piece of sewn cloth or $25 for an iPhone case made with about 20 cents worth of plastic (the packaging probably costs more than the product itself), you'd think they could be manufactured in the U.S. (or other high labor cost country).

Workers in the third world should not suffer so that westerners can have a device to send tweets and play games for a low price. While we shouldn't expect exactly the same conditons as we are used to for these workers, it's reasonsable that they shouldn't have to work 70-80 hours per week and still not have enough money (or time) to change their station in life.

So in my opinion, let the labor costs rise and if that means the phone will cost (after subsidy) $219 instead of $199, so be it.

We've become completely spoiled by the absurdly low prices of most consumer electronics and as a result, we've become even more of a "throw-away" society. And one of the costs of that insistence that everything be priced so low ($49 DVD players anyone?), is that we've exported millions of factory jobs (which isn't all bad news - it's not terrible that people in the third world are gaining employment and in at least some cases, creating a middle class, if they don't feel like committing suicide first).

And yet, there are items that are priced (IMO) absurdly high: like $40 cases for an iPad. For $40 for a small piece of sewn cloth or $25 for an iPhone case made with about 20 cents worth of plastic (the packaging probably costs more than the product itself), you'd think they could be manufactured in the U.S. (or other high labor cost country).

Rather than looking on the negative side of things all the time. The western desire for gadgets and other goods has accelerated development of many poor countries.
And when it becomes economically viable, india and vietnam (as someone just said) will be next on the list to benefit.
It's not all violin playing misery.
To allow labour costs to artificially rise, denies someone else, in another country, with even less money, a chance to benefit from globalisation.

Workers in the third world should not suffer so that westerners can have a device to send tweets and play games for a low price. While we shouldn't expect exactly the same conditons as we are used to for these workers, it's reasonsable that they shouldn't have to work 70-80 hours per week and still not have enough money (or time) to change their station in life.

So in my opinion, let the labor costs rise and if that means the phone will cost (after subsidy) $219 instead of $199, so be it.

How about bringing iPhone and iPad production to Mexico. Maybe it will help quell the drug violence if people have alternative legitimate sources of income. Perhaps we can even pay them higher wages if we use part of the drug war money for that.

How about bringing iPhone and iPad production to Mexico. Maybe it will help quell the drug violence if people have alternative legitimate sources of income. Perhaps we can even pay them higher wages if we use part of the drug war money for that.

Better yet, how about bringing manufacturing back into the United States? I do my best to buy "Made in USA" but it's not always possible. One day there won't be any more developing nations to exploit, and manufacturing abroad may be more expensive than here at home.

Workers in the third world should not suffer so that westerners can have a device to send tweets and play games for a low price. While we shouldn't expect exactly the same conditons as we are used to for these workers, it's reasonsable that they shouldn't have to work 70-80 hours per week and still not have enough money (or time) to change their station in life.

So in my opinion, let the labor costs rise and if that means the phone will cost (after subsidy) $219 instead of $199, so be it.

We've become completely spoiled by the absurdly low prices of most consumer electronics and as a result, we've become even more of a "throw-away" society. And one of the costs of that insistence that everything be priced so low ($49 DVD players anyone?), is that we've exported millions of factory jobs (which isn't all bad news - it's not terrible that people in the third world are gaining employment and in at least some cases, creating a middle class, if they don't feel like committing suicide first).

And yet, there are items that are priced (IMO) absurdly high: like $40 cases for an iPad. For $40 for a small piece of sewn cloth or $25 for an iPhone case made with about 20 cents worth of plastic (the packaging probably costs more than the product itself), you'd think they could be manufactured in the U.S. (or other high labor cost country).

Even if the products were assembled in the USA, all the components would likely come from China, Taiwan and South Korea.

Even if by some miracle, the USA managed to build up the colossal supply chain necessary to supply all these parts, and be competitive with the one already in place in Asia, the chemicals and metals necessary for those components are...sourced from Asian companies that have strangled the supply.

The Chinese are deceitful in their exporting practices. Brazil had been importing shoes from China last year, then for 2010 it decided it would not import from China but from another asian country. China "laundered" the shoes through that other asian nation and still got the shoes into Brazil. I guess that's partly our own fault for outsourcing manufacturing to lowest bidder...

How about bringing production to the USA. Support American workers. Let cost be higher if necessary.

I fully agree with supporting local industry when possible (I am Canadian, but the sentiment is the same), but I don't think you understand exactly how much this would increase the cost of these products. These workers are putting in 1.5 to 2 times MORE hours per week, and yet are still bringing home in one WEEK what many American/Canadian employees would be bringing home in a DAY. That is a massive increase in labour costs. Sure, you'd save a bit of money in shipping, but it wouldn't even come close to compensating. While it is unfortunate, especially since you guys could surely use the jobs right now, I can't think of any way that we could build these products in North America and still sell them at even close to the same price. VERY few people would be willing to pay for an iphone/droid/etc. with that much of a price hike.

I fully agree with supporting local industry when possible (I am Canadian, but the sentiment is the same), but I don't think you understand exactly how much this would increase the cost of these products. These workers are putting in 1.5 to 2 times MORE hours per week, and yet are still bringing home in one WEEK what many American/Canadian employees would be bringing home in a DAY. That is a massive increase in labour costs. Sure, you'd save a bit of money in shipping, but it wouldn't even come close to compensating. While it is unfortunate, especially since you guys could surely use the jobs right now, I can't think of any way that we could build these products in North America and still sell them at even close to the same price. VERY few people would be willing to pay for an iphone/droid/etc. with that much of a price hike.

So you think these workers "putting in 1.5 to 2 times MORE hours per week, and yet still bringing home in one WEEK what many American/Canadian employees would be bringing home in a DAY" is just so that we can have low cost gadgets?

Do you stop to think that it might actually make families better off, by affording them things that they otherwise could not have?

Or, are material things such as toys and electronics and torches only for people like us?

That's actually a pretty good point. Well, "us" is different, because I'm in Malaysia right now. The main financial pressures on the middle class (OMG I used the word "class" LOL) here is housing, medical fees, petrol and groceries.

It is true that China-made stuff has given a wide variety of material goods to many people, even in developing countries. But it can be a double-edged sword. It means that manufacturing capability and foreign investment is reduced in that developing country compared to China, for a wide range of goods.

On the other hand though, there are more pressing issues here in Malaysia like the cost of staples, housing prices and petrol prices. Also car prices.

Bottom line, for developing countries, cheap stuff from China can equal happy + affordable, but remember that these developing economies have to compete directly with China on many fronts, not least manufacturing.

Personally, I'm concerned with human rights & dignity kind of issues. Economic issues, such as countries not being able to successfully compete with this-or-that-other-country, is a totally different game because it is dependent on a whole lot of other things like good government, etc.

I fully agree with supporting local industry when possible (I am Canadian, but the sentiment is the same), but I don't think you understand exactly how much this would increase the cost of these products. These workers are putting in 1.5 to 2 times MORE hours per week, and yet are still bringing home in one WEEK what many American/Canadian employees would be bringing home in a DAY. That is a massive increase in labour costs. Sure, you'd save a bit of money in shipping, but it wouldn't even come close to compensating. While it is unfortunate, especially since you guys could surely use the jobs right now, I can't think of any way that we could build these products in North America and still sell them at even close to the same price. VERY few people would be willing to pay for an iphone/droid/etc. with that much of a price hike.

Oh I fully understand what it would do to the cost per item to move mfgring to the USA ... companies like Apple would not be able to charge $6-700 for an iPhone and still make $3-400 on the deal using cheap labor from countries like China (RE: article on the actual cost for building an iPhone). It is just time to stop exporting jobs at the cost of the American worker.

It is called chasing the grass huts, cheap labor always exist where the grass huts are and once the huts disappear so does the manufacturing.

China with all it cheap labor killed so many countries ability to compete in the world market due to the fact these other countries had nothing to offer its work force other than cheap factory jobs. At least in the US there are other things people can do to make a living, so the question will be, can China do the same or will they loose out to places willing to offer cheap labor.

All you who keep complaining about how little they are paid and the jobs should come back the US, you all act like they are force to work for little pay it not 100% that way, many of these people rather do these jobs then work in a field somewhere and not get paid or get pay in food. Also people in the US are not willing to work for such little wages, and before you go off and said they should not have too, you decide what is reasonable wags for someone, are you willing to work for minimum wage because that is what these people get paid in their countries.

So many of you have this entitlement attitude that I would never work for such little pay or so many hours and these people should not. The only way you can afford to say that is because your parent probably did. I know my parent work long and hard for very little so I did not have too, but I do not run around and say hey everyone should make what I make no matter where they live in the world. As dumb as that sounds is how dumb it is to say these people are being taken advantage of.

If you really feel that way get off this discussing board and get rid of you slave labor computer and other products and do something about. Otherwise you are no better than everyone else.

Like I used to say to the tree huggers, you impact the earth as much as everyone else and unless you are living in the woods naked and living off the land you have no room to criticizes anyone for what they are doing.

The report draws heavily from a teardown report of iPhone 4 from market research firm iSuppli. The El Segundo, Calif., firm placed the total bill of materials for the new smartphone at $187.51, but does not include labor and manufacturing costs. According to the Times, the combination of sharply rising wages, continued appreciation of the Chinese currency, and unsustainable labor practices are threatening both the margins of contract manufacturers and major brands and the stability of China's manufacturing boom.

I can pretty much guaranty you this report is wrong, I have seen iSupply report on product my companies makes and their numbers are all over the place, they have no clue what Manufacturers are paying for parts. I can not say if their estimates are high or low since they been in both directions for the analysis I have seen them do.

Even if wags do increase, it going to be a small percentage of the over all cost of the phone. Most all the other parts in the phone are produced in highly automated factories which labor is also a very small % of the cost, most of these places have very few people working in them.

Oh for the whiner complaining about these jobs leaving America, the most expensive part in that phone are design by companies in America so most of the cost of phone goes directly into the hand of people in America.

Sure, let's prevent the employment of jobless Africans at exploitive third-world wages. Better they should be free of such evil in order to continue feeding their starving children with cakes baked from a little grain and a lot of dirt.

I admit to being a Fanatical Moderate. I Disdain the Inane. Vyizderzominymororzizazizdenderizorziz?

Sure, let's prevent the employment of jobless Africans at exploitive third-world wages. Better they should be free of such evil in order to continue feeding their starving children with cakes baked from a little grain and a lot of dirt.

How about decent wages to live on?
It doesn't have to be exploitation vs starvation (where exploitation is the better option)

If the world really was serious about poverty we would have a 0.001% tax on international currency exchanges. That is a speculative market that produces nothing except wealth for those who are already wealthy. 0.001% is negligible for most individual transactions but would still generate several billion dollars per day that could be earmarked for food and medical care for those in poverty.

"The El Segundo, Calif., firm placed the total bill of materials for the new smartphone at $187.51, but does not include labor and manufacturing costs."

A bill of materials that included labor and/or manufacturing costs would not be a bill of materials. I hate to be overly picky, but it would have been better to write "... the total bill of materials (which doesn't include labor and manufacturing costs) for the new smartphone ...".